Questions to Ask About Alternative Loans
We would encourage families to explore their eligibility for all federal loan programs before turning to this resource. In most cases, Federal Student Loans will provide the consumer with more beneficial terms and conditions, including a lower annual percentage rate charged on the principal and fewer and lower fees.
Because of their overall costs, alternative loans should be used only if you have no other viable alternatives. Investigate the answers to the following questions as you evaluate the lenders. You may also download a model alternative loan disclosure (PDF). You should also review Review Private Loans :Facts and Trends (August 2009) from the Project on Student Debt
- What is the principal amount that you must repay?
- What is the loan's Interest rate?
- What is the Annual Percentage Rate ("APR")? The APR is the TOTAL COST of the loan including the interest rate and any fees, expressed as an annual percentage of the principal amount that would be paid over the life if the loan.
- What fees do you have to pay when the loan is disbursed?
- What will your minimum monthly payment be?
- How long do you have to repay the loan?
- What is the total amount that you will pay in interest over the life of the loan?
- Is the interest rate on the loan fixed or variable? Variable interest rates change over the life of the loan. As the rate varies, the monthly payment amount also changes.
- When can the interest rate change? Variable interest rates are tied to a common market index. As the index goes up and down, your interest rate (and monthly payment) goes up and down too. The change can occur monthly, quarterly, or annually.
- Is there a cap on the interest rate? A cap on the interest rate prevents the variable interest rate from going above a certain level. Most private education loans do not have interest rate caps.
- What will my monthly payment be if the interest rate hits its cap? This is the most you will have to pay each month if the interest rate increases to its maximum level.
- Do I pay I pay interest and principal while I am in school? Some loans do not require you to pay principal or interest while you are a full-time student or during grace periods. The interest that accumulates during the grace period is added to the amount you must repay.
- How long is the grace period? This is the number of months that you do not have to make payments.>
- Do I pay a penalty if I repay the loan early? Some loans charge a pre-payment fee if you repay the principal balance early.
- What if I have trouble repaying the loan? Lenders may permit you to defer payments if you are having financial difficulties.
Updated June 25, 2010